Private Equity Capital to Become More Diverse, Increase in 2011

There is a considerable amount of private equity capital that is looking for investment opportunities in commercial real estate—and this diverse range of sources is expected to increase investment activity this year, according to Bob White, founder and president of Real Capital Analytics, a New York City–based firm that tracks office, hotel, industrial, apartment, and retail properties and markets around the world.

White gave the opening presentation at the Urban Land Institute’s “Real Estate Finance and Investment 2011” conference in New York late last month.

“It is a very complex marketplace right now,” he said to a crowd at the Sheraton New York Hotel & Towers. “There are certain sectors that are performing incredibly well and certain sectors that have been left largely behind in any type of rebound whatsoever.”

During his presentation, White touched upon a wide range of capital markets topics, lending a global perspective to the subject at hand. He reported that there is currently enormous Asian and European investor interest in U.S. property.

“A significant new trend is that we are seeing a lot of capital coming out of China [that is] making a home here in the U.S. This may be the tip of the iceberg,” he added.

Despite the roller-coaster ride that U.S. commercial real estate has been on over the past decade, there appears to be recovery in larger assets in the six primary markets: New York, San Francisco, Boston, Chicago, Los Angeles, and Washington, D.C. While overall pricing “appears to be bouncing around the bottom,” mostly due to distressed sales in the marketplace, there is a large concentration of capital driving prices in these markets.

Even though 45 percent of all 2011 office property deals have been in New York, San Francisco, and D.C., capital is starting to move away from these three markets, especially in the apartment and retail sectors.

White provided some promising news, adding that commercial real estate is currently attractive to all types of investors. This is mainly driven by a craving for yields.

“We have a marketplace that is starved for yields,” said White. “The market now is better than what it was in the beginning of 2009 and commercial real estate is currently attractive for capital,” he added. “It is not just to real estate investors where that spread looks attractive; that spread is attractive to any investor. It is bringing capital into the real estate marketplace.”

White described equity capital in commercial real estate as becoming “deep and increasingly diverse” in composition. He predicted both real estate investment trusts (REITs) and foreign entities to constitute bigger shares in the overall percentage of buyers this year.

On the issue of mortgages, White said that the overall picture is still improving; however, “there are pockets where lending is still tough.” In regard to maturing commercial mortgages, he pointed out that commercial mortgage–backed securities (CMBS) loan payoff numbers remain very poor, averaging around 50 percent. According to White, this number needs to be at 90 percent before an economist can safely say that the market has fully recovered.

When asked whether new regulatory issues will affect the composition of commercial real estate lenders, White responded that banks will eventually ease up and once again become a bigger player in commercial lending.

“The banks have to become a bigger part of the market—they have to—so I am not worried about that,” he said. “But it is going to be a long-term process for that [to happen].”

According to Trulia’s chief economist, U.S. home prices were 2 percent undervalued in the fourth quarter of 2014. But the most overvalued market in the country is now Austin, at 16 percent overvalue, followed by Orange County and Los Angeles in southern California. Nine of the 100 largest metro areas are 10 percent or more overvalued.

Competition for prime assets in Europe’s major real estate markets is leading investors to continue their move into secondary assets and recovering markets, according to Emerging Trends in Real Estate Europe 2015, a forecast published jointly by ULI and PwC.